How Is Vale Likely To Grow In The Next 2 Years?

Vale (NYSE: VALE) displayed consistent strength in its operations over the past two years as it recovered from the commodity downturn and ramped-up its sought-after S11D mines. Vale’s top line grew by 20% year-on-year (y-o-y) in 2017 as a result of the same. However, looking ahead, we expect Vale’s top line to grow moderately at a CAGR of 3% over the next two years as the growth in the company’s iron ore sales volume and nickel sales volume remains limited in the near term.

Trefis

Vale’s iron ore output grew by 5% y-o-y in 2017 with the ramp-up of the company’s S11D mine, however, its total sales volume declined marginally by 70 basis points. The stagnant sales volume largely reflects China’s steel curtailing activity which has shut a large number of the country’s illegal and outdated steel plants. China has already closed about 120 million tons of annual crude steel capacity since its announced plan in 2016. China’s steel capacity back then was estimated at 1.2 billion tons and the country aims to reduce this output to less than 1 billion tons by 2025. As China shuts down its steel capacity, the demand for iron ore from the Chinese steel plants is likely to weaken. Although Vale holds a comparatively stronger stance in this whole situation, due to its access to higher grade iron ore, sales volume is still expected to remain weak even with the ramp-up of the company’s S11D mines. Over the next two years, we anticipate most of the company’s revenue growth will be driven by the premium pricing on its iron ore sales.

Additionally, the company’s stance on reducing its nickel output through the next four years would hinder Vale’s top line growth as nickel prices are currently trading at a record high level. Nickel prices have gained substantial strength with the environmental production cuts across China, declining inventories, and a strong demand environment. Vale, however, determined to reduce its nickel output in order to benefit from a future environment of increased nickel prices and also to align with the company’s ongoing debt-reduction strategy. Vale’s nickel production fell by 7% Y-o-Y in 2017 and is expected to decline by another 9% in 2018. Soaring nickel prices are expected to provide some relief to the company’s declining output, however, the revenue is expected to remain dim in the near term.

Our estimates for Vale’s two years’ projected revenue growth are elaborated in our interactive dashboard. You can make changes to our assumptions to arrive at your own revenue estimate for the company.

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